What Happens When Retirement Money isn't in a Qualified Retirement Plan?

I am a single parent, age 56 and my daughter will be applying for
college next year. I make less than $60,000, but have just over
$100,000 in savings and mutual funds that I have saved towards
retirement as I am self employed. (I just recently found out about
other self employed retirement options.) Will my daughter receive less
financial aid because I do not have this savings in a “specified”
retirement fund?
— C.J.

Money that is not in a qualified retirement plan account is reported
as an asset on the FAFSA even if the parent intends to use the money
for retirement. The money is reported as an asset even if the parent
has already reached retirement age. The money must be reported even if
it is stuffed in a mattress.

Nevertheless, some reportable assets are sheltered by the federal need
analysis methodology.

The simplified needs test causes all assets to be ignored if the
parents’ adjusted gross income is less than $50,000 a year and the
parents were eligible to file IRS Form 1040A or 1040EZ or the family
satisfies certain other criteria relating to means-tested federal
benefit programs.

Otherwise, there is an asset protection allowance that shelters a
portion of parent assets based on the age of the older parent. The
asset protection allowance fluctuates up and down from one year to the
next based on the inflation rate. For most parents of college-age
children, median age 48, it will be about $40,000 to $50,000. For
parents age 56, it will be about $48,000 to $65,000. For parents age
65 or older, it will be about $62,000 to $84,000.

Any reportable assets above the asset protection allowance will be
assessed on a bracketed scale that runs from 2.64% to 5.64%. (For independent
students with dependents other than a spouse, the bracketed scale runs
from 1.54% to 3.29%.)

So in a worst case scenario, $100,000 in reportable parent
assets ($50,000 after subtracting the asset protection allowance) will
reduce eligibility for need-based financial aid by no more than
$2,820, as compared with having the money in a qualified retirement
plan.